US academics revisit the role of Hounslow-based trader Navinder Singh Sarao in
the 2010 market panic

New research on the Flash Crash that ripped through the financial markets in 2010 suggests that the Hounslow-based trader accused of placing spoof orders was not a major cause of the turmoil.

Navinder Singh Sarao, who will return to court next week to fight extradition to the United States, was arrested last April on US charges of market abuse taking place over several years.

The American authorities have not said he was the sole cause of the 1,000-point rollercoaster on the Dow Jones index nearly six years ago, but they have argued that his trading “contributed to an... order book imbalance that contributed to market conditions that led to the Flash Crash”.

A draft of a new study, drawing on work from economic, legal and astrophysics experts in California, claims to be the first instance of anyone analysing the order book of buy and sell orders in S&P 500 derivatives down to the millisecond – or one thousandth of a second - during the crash.

The paper agrees with the US regulators’ initial account of the market carnage, which pointed to a large sell order from the mutual fund Waddell & Reed that worsened the jitters in a marketplace already unsettled by the eurozone crisis.

“While assertions relating to causation of the Flash Crash must be accompanied by significant disclaimers, we suggest that it is highly unlikely that, as alleged by the United States Government, Navinder Sarao’s spoofing orders, even if illegal, could have caused the Flash Crash, or that the crash was a foreseeable consequence of his spoofing activity,” the paper states.

“Indeed, if Sarao’s relatively small-scale trading could in fact generate the large-scale effects asserted by the government, modern equity market structures could be viewed as alarmingly fragile.”

The academics also noted signs of delays in certain price quotes reaching the consolidated tape system around the time the crash began, which they are still investigating. Their paper, entitled "The Flash Crash: A New Deconstruction", was released online this week.

One of the authors, Joseph Grundfest, a law professor at Stanford and a former commissioner at the Securities & Exchange Commission, told Bloomberg that “the paper was circulated very quietly among a very small number of people. There was no intent or desire to have it public at this stage”.

“It’s very important for society to get the diagnosis correct here; if we misunderstand what caused the crash, we can’t do a good job preventing the next one,” he added.

The Flash Crash on May 6, 2010 wiped 1,000 points from the Dow Jones index before prices abruptly bounced back four minutes later. For brief periods, blue-chips stocks such as Accenture and Apple fell to one cent, or soared to $100,000, before returning to their previous values.